Inside Patisserie Valerie, A Rich Center of Fraud

Since last October, Patisserie Valerie, the United Kingdom-based café chain that specialized in handcrafted cakes, has undergone a slow but irreversible collapse, like an overheated soufflé, thanks to a massive £40 million “black hole” found in the company’s accounts. The following timeline shows some of the key events leading to the firm’s demise:

October 10, 2018: Patisserie Holdings plc made two significant announcements: (1) that it had learned that it had learned that HM Revenue and Customs (HMRC) had filed a “winding-up” petition in the High Court affecting a Patisserie subsidiary, Stonebeach Limited, for approximately £1.14 million in taxes owed; and (2) that Patisserie Holdings’ board had been “notified of significant, and potentially fraudulent, accounting irregularities and therefore a potential material mis-statement of the company’s accounts.” During that week, the firm found that company overdrafts had been set up with two banks, Barclays and HSBC, and that £9.7 million had been used by the time they were discovered.

October 12, 2018: After the firm’s finance director, Chris was reportedly arrested and released on bail without charge the preceding evening, the Serious Fraud Office announced that it had opened a criminal investigation into an unnamed individual relating to the firm. Also, by mid-October, multiple press reports indicated that the firm had a “black hole” of some £40 million.

January 16, 2019: Patisserie Holdings announced that “the misstatement of its accounts was extensive, involving very significant manipulation of the balance sheet and profit and loss accounts. Among other manipulations, this involved thousands of false entries into the Company’s ledgers. . . . The initial indications from the work carried out to date is that the cash flow and profitability of the business has been overstated in the past and is materially below that announced in the trading update on 12 October 2018, which was based on limited work carried out over a 48-hour period.”

January 22, 2019: Patisserie Valerie was forced into administration after it was unable to work out financing with banks, and after it reportedly failed to share with the banks a report by accounting firm PwC that “allegedly detail[ed] how suppliers provided fake invoices and multimillion-pound cheques were submitted to artificially inflate cash balances.”

January 28, 2019: The Daily Telegraphreported that “Patisserie Valerie sales were in secret decline for at least three years before the discovery of the [£40 million] accounting black hole . . . .”

February 3, 2019: The Timesreported that a PwC forensic report said that PwC “identified forged company minutes used to take out overdrafts of almost £10m and fake invoices for shop refurbishments.”

Note: The sad tale of Patisserie Valerie’s collapse provides an object lesson in why small and medium enterprises, as much as FTSE 1000 and Fortune 500 companies, need to dedicate part of their compliance program to internal fraud. Evidently neither the firm nor its outside auditor were focused on monitoring for fraud, but employees, investors, and patrons are now suffering the consequences of the firm’s failure to monitor internal transactions and accounts for possible embezzlement or fraud. Like the protein and egg yolk in a soufflé, which strengthens the internal structure of the soufflé and prevents its collapse, a sound internal-fraud compliance program with trained staff and effective internal controls strengthens a company’s compliance architecture and reduces the risk of substantial damage to the company’s operations and reputation.

Despite the waves of adverse publicity about its demise and the apparent fraud, Patisserie Valerie reportedly has now attracted multiple offers for all or parts of the business. With luck, acquiring companies may find what is left of the firm palatable, notwithstanding “claims by some bidders “that many of Patisserie Valerie’s shops were losing vast sums of money, and not profitable as the company had claimed.” Unfortunately, pre- and post-transaction due diligence by the buyers, along with further law enforcement inquiry, will likely find that the full scale of the internal fraud is even greater than reported so far.

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Published by Jonathan J. Rusch

I'm a lawyer and consultant interested in corporate- and individual-compliance issues, and an inveterate part-time law professor; a former federal prosecutor, regulator, and anti-bribery and corruption compliance head at a global financial institution; and a (very minor) shareholder in Williams Grand Prix Engineering.
View all posts by Jonathan J. Rusch